Investors Should Avoid Paying Up for Indexed Performance

Sam Mamudi, writing for the Wall Street Journal, has a lengthy article regarding funds that basically mirror the broad indexes, but charge substantially higher fees than a plain vanilla index fund. Funds that follow an index closely can be identified by a high “R-squared” score. A fund’s R-squared score, figured by comparing the fund’s performance to a benchmark, measures the percentage of a fund’s returns that can be explained by the index’s movements.

One fund that has been able to justify its fees is the JP Morgan U. S. Equity fund with a 5 year R-squared score of 98.8%, meaning it correlates highly with the S&P 500. However, the fund was able to beat the indexes return by 2.3 percentage points per year for the five years ending November 30, 2009. It outperformed by weighing more heavily those companies whose performance was better than the average stock in the index.

Disclaimer: It is very difficult to outperform a buy and hold strategy. Many investors have found themselves best served over long time horizons by investing regularly in a diversified portfolio of stocks or low cost, broadly diversified indexed stock funds. Information presented is based on analysis of past data and assessments by the Tactical Timing System model. Future performance may not reflect past performance. Profitable trades are not guaranteed. No system or methodology ensures stock market profits. Although accuracy is strived for, no guarantee is made regarding the accuracy of data presented. Nothing presented here should be considered investment advice, but merely the humble opinion of the author.